Puerto Rico’s predicaments: Is its minimum wage the culprit?

Puerto Rico today faces a serious debt crisis, recently defaulting on a bond payment. The proximate cause is a slowdown in economic growth since the mid-2000s, which has reduced tax revenues, and a declining labor market, where employment growth has been mostly in the red since 2007.

There are many explanations for the economic downturn and the resulting fiscal crisis, but some commentators have incorrectly blamed the island’s high minimum wage. To be sure, the federal minimum wage—which has applied to Puerto Rico since 1983—is much more binding there than it is on the mainland. Because hourly wages are substantially lower in Puerto Rico compared to the U.S. mainland, the federal minimum wage policy affects more of the workforce there. In 2014, for example, the federal minimum wage stood at 77 percent of the median hourly wage in Puerto Rico, compared to 42 percent in the United States. For comparability with existing estimates, if we consider wages of full time workers only, these figures are approximately 70 percent in Puerto Rico and 38 percent in the United States, respectively. Finally, the minimum wage stands at 56 percent of the wage earned by production workers in manufacturing, compared to 38 percent in the United States. Clearly, the Puerto Rico’s minimum wage exceeds the cautious rule-of-thumb of 50 percent of median wage of full-time workers suggested by one of us in previous work.

But does that make it a probable culprit for the island’s current debt and economic troubles? The short answer is: not very likely …